The thing about the one bank that is in distress being taken over, you get into a field, of course, which is basic philosophy, when it is in distress to be taken over and operated as a branch. You will have to limit that very definitely, because it is a back door, and certainly can be looked upon as a back door entrance to branch banking within a State where branch banking is not permitted. I think that is a very controversial subject. If you want to accomplish that one purpose, it might be done, but with great restrictions in it to prevent it from becoming a controversial issue.

Senator ROBERTSON. Gentlemen, as previously announced, lunch will be served in the family dining room, in the Senate Restaurant, at 12:30. Owing to the depressed price of broilers in the valley of Virginia, the chairman ordered chicken, but if any of our guests want to eat fish today, they can have that substituted.

The committee will stand in recess until 2 p. m.

(Whereupon, at 12:15 p. m. a recess was taken until 2 p. m. of the same day.)

AFTERNOON SESSION

Senator ROBERTSON. The committee will please come to order.

It gives the Chair pleasure to recognize at this time Hon. James Robertson, member of the Board of Governors of the Federal Reserve Board.

STATEMENT OF J. L. ROBERTSON, MEMBER, BOARD OF GOVERNORS, ACCOMPANIED BY GEORGE B. VEST, GENERAL COUNSEL, FEDERAL RESERVE BOARD

Mr. ROBERTSON. Mr. Chairman, I can proceed in any way you think appropriate. I do have a statement which represents the viewsSenator ROBERTSON. This morning we permitted the witness to present his prepared statement without interruption, and we believe that will save time.

Mr. ROBERTSON. I think that is right.

The Board of Governors welcomes this opportunity to express its views as to proposals for improvement of the banking laws.

In response to your committee's request, the Board submitted several weeks ago a number of recommendations for changes in the statutes relating to the Federal Reserve System. As indicated in the Board's letter of transmittal, these recommendations are not directed at fundamental policy matters or the structure or scope of authority of the banking agencies, except for two proposals recommended by the Board during the last session of Congress. The recommendations relate chiefly to the repeal of obsolete provisions and changes designed to improve the operational activities of the System.

The Board's suggestions are arranged according to the numerical sequence of the sections of the Federal Reserve Act to which they relate. For the sake of simple presentation, they are discussed under four broad categories: First, those which would repeal clearly obsolete provisions; second, those which would repeal provisions which appear to have no present significance or importance; third, those which are aimed at improving the operations of the Federal Reserve banks and the Board; and, fourth, those which are designed to clarify or make more workable provisions relating to the supervision of member banks of the Federal Reserve System. For identification, I shall refer to the

Boards' suggestions by the numbers assigned to them in the committee's print of legislative recommendatitons.

REPEAL OF OBSOLETE PROVISIONS

Nearly half of the 40 recommendations submitted by the Board relate to the proposed repeal of provisions which for one reason or another are clearly obsolete and of no legal effect. Many of these provisions are no longer carried in the United States Code; and their repeal would make no changes in substance. Consequently, there appears to be no need to take the time to explain each of these recommendations.

By way of illustration, however, I may say that a number of provisions of the Federal Reserve Act relate to the original organization of the Federal Reserve banks. These provisions have all been fully executed and are obviously obsolete. Similarly, certain provisions of the law have a definite termination date which has long since expired. Again, some provisions refer to obligations of certain Government agencies that have been dissolved or are in process of liquidation.

In the same class with such obsolete provisions are a few provisions which contain references that are obviously incorrect, such as, for example, a reference to the "six" members of the Federal Reserve Board, and references to section 12B of the Federal Reserve Act, a section relating to deposit insurance which was withdrawn from the act some years ago and reenacted as the Federal Deposit Insurance Act.

Repeal of the obsolete provisions and correction of the inaccurate references mentioned in the Board's recommendations would, of course, be a part of any codification of the laws relating to the Federal Reserve System. In addition, such a codification might include a rearrangement of certain sections and of provisions within some sections in order that provisions on the same subject may be grouped together. The work involved in any codification would obviously be of a technical nature; and the Board's staff will be glad to furnish any assistance in this connection that may be desired by your committee.

PROVISIONS OF NO PRESENT SIGNIFICANCE

Certain provisions of the law are not legally obsolete, but as a practical matter do not, in the Board's opinion, have any present significance or importance and are obsolete for all intents and purposes.

Thus, recommendation No. 65 would repeal a section of the law which authorizes the Reserve banks to make advances to groups of member banks, subject to a number of rigid limitations. This authority was enacted in 1932 as an emergency means of providing credit under the conditions then existing. No advances have ever been made under this authority and it seems clear that it serves no useful purpose at present and should be repealed.

Again, there is a provision of the original Federal Reserve Act which imposes double liability with respect to stock held in the Federal Reserve banks. Since that time, the double-liability feature has been discarded as to national bank stock and as to many State banks. The Board feels that the provision of the law imposing double liability with respect to Federal Reserve bank stock is unnecessary and, in recommendation No. 48, suggests that this provision be repealed.

Section 7 of the Federal Reserve Act contains a provision requiring that net earnings derived by the United States from the Federal Reserve banks shall, in the discretion of the Secretary of the Treasury, be used to supplement the gold reserve against United States notes or applied to the reduction of the bonded indebtedness of the United States. Any practical effect that this provision might have had on the use of funds by the Treasury appears to have been superseded by the general statute covering the administration of the public debt. This provision, therefore, would be repealed under recommendation No. 55. A provision of present law, which was part of the original Federal Reserve Act, provides that, whenever any power vested by the act in the Board of Governors appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary. While not entirely clear, this provision presumably was meant to avoid any question as to the effect of the Federal Reserve Act on the supervision, management, and control of the Treasury Department. In any event, the removal of the Secretary and the Comptroller of the Currency from ex officio membership on the Board by the Banking Act of 1935 clearly indicated an intent that the Board should perform its functions according to its own best judgment. So far as is known, this provision has never had any significant effect on any of the operations or authority exercised by the Federal Reserve System or the Secretary of the Treasury, and recommendation No. 63 would repeal this provision as being in the category of provisions that have no present significance.

OPERATIONS OF THE FEDERAL RESERVE BANKS AND THE BOARD

The remaining 19 recommendations of a total of 40 of the Board relate to changes which are largely aimed at clarifying or improving the operations of the System. Eleven of them relate to the operational activities of the Federal Reserve banks and the Board.

Recommendation No. 51 would amend the law to provide that all directors of the Federal Reserve banks shall be residents of the Federal Reserve district of the Reserve bank on whose board they serve and shall continue to be residents during their term of office. Present law provides that class C directors appointed by the Board must have been residents of the district for at least 2 years; but there is no specific requirement that all directors shall be residents of the district or, even in the case of class C directors, that they shall cease to be directors if they should move out of the district.

Recommendation No. 52 would limit the service of Federal Reserve bank directors, other than the chairman, to 2 consecutive terms of 3 years each. Such a provision for rotation in the directorates of the Reserve banks seems desirable in order to obtain the advantages of broader representation and wider experience over a period of time. A similar suggestion with the same purpose in mind is made for rotation of service on the Federal Advisory Council.

Recommendation No. 53 would clarify the right of the Federal Reserve agent at each Federal Reserve bank to delegate his ministerial functions to assistants, in order that the agent, who is also chairman of the board of directors of the Reserve bank, may devote more attention to the policy matters involved in Reserve bank operations. It would be made clear also that an assistant Federal Reserve agent

could act in lieu of the agent in the event of a vacancy in that office. The present requirement that both the agent and assistant agents be persons of "tested banking experience" would be eliminated as unnecessary, leaving to the Board's discretion the determination whether a person appointed is properly qualified for the position. When the Federal Reserve Act was passed, it was expected that the chairman would be a full-time officer of the bank. Such was the case until after the passage of the Banking Act of 1935, which provided that the president should be the chief executive officer of the bank. Following that, the chairmanship was made a nonsalaried position, and the nature of the duties does not call for "tested banking experience."

Recommendation No. 54 suggests specific authority for payment to the United States by the Federal Reserve banks of a percentage of their net earnings after expenses and dividends. Provision for a franchise tax existed prior to 1933, but was repealed when the Reserve banks were required to use half their surplus to subscribe to the initial capital stock of the Federal Deposit Insurance Corporation; and for some years thereafter the net earnings of the Reserve banks were relatively small. In 1947, however, their earnings had increased substantially; and at that time, after discussing the matter with the Banking and Currency Committees of the House and Senate, the Board acted under section 16 of the Federal Reserve Act to impose an interest charge on the amount of outstanding Federal Reserve notes of each Federal Reserve bank in excess of the amount of gold certificates held as collateral. In this way, approximately 90 percent of the net earnings of the Reserve banks was paid to the Treasury, and this has been done annually since that time. The Board believes, however, that it would be desirable for Congress to provide specifically for transfer to the Treasury of a part of the net earnings of the Federal Reserve banks without relation to the amount of outstanding Federal Reserve notes. This could be done by an amendment specifically authorizing the Board to require the Reserve banks to transfer annually to the United States Treasury such portion of their net earnings as the Board might deem appropriate, or in the alternative, if Congress prefers, by restoration of the provision for a franchise tax equal to 90 percent of the Reserve banks' net earnings after provision for expenses and dividends and such reserves for contingencies as may be necessary. We are submitting legislative language with respect to both methods so that the committee and Congress may consider which method is preferable.

Recommendation No. 56 relates to taxation of dividends on Federal Reserve bank stock. The Public Debt Act of 1942 removed a previous exemption of such dividends from taxation, but only with respect to stock issued after the date of that act. The proposed amendment would eliminate the exemption as to dividends on stock issued before that date, thereby placing member banks admitted to membership before 1942 on the same basis as those admitted after 1942.

Recommendation No. 64 would eliminate from the law the present dollar limitation on expenditures for buildings for branches of the Federal Reserve banks. Since that limitation was first placed in the law in 1922, it has been necessary in 1947 and again in 1953 for Congress to increase the statutory limitation in order to permit further branch construction and improvement necessary to keep pace with the

increased volume of business and activities of the branches. No appropriations of Government funds are involved and the Board believes that a specific dollar limitation is unnecessary; but the existing requirement of the law for the Board's approval for all expenditures of this kind should be retained.

Turning to another aspect of Federal Reserve bank operations, the Board believes that the activities of the Reserve banks as fiscal agents of the United States and of various agencies of the Government should be made specifically subject to supervision and regulation by the Board. At present, certain governmental agencies are authorized by statute to utilize the Reserve banks as their fiscal agents, with no specific provision for overall coordination. Such activities have increased substantially in recent years and it is more important than ever before that they should be coordinated through supervision by the Board of Governors. Accordingly, it is desirable that the Board's authority to supervise and regulate this substantial segment of Reserve bank operations be specifically covered by the law. This would be accomplished by our recommendation No. 67.

In connection with their open-market operations, the Reserve banks for many years have utilized repurchase agreements as a convenient and flexible means of helping to smooth out temporary irregularities in the money market. The usual type of such an agreement is one by which a Reserve bank purchases Governments securities from a nonbank dealer in such securities under an agreement on the part of the dealer to repurchase the securities within a specified period of time at an agreed-upon price and rate of interest. While the agreement has some of the attributes of a loan, it has the legal form of a purchase and sale.

Under instructions of the Federal Open Market Committee, such agreements may be for periods of not more than 15 days and may cover only Government securities maturing within 15 months, and the interest rate may not be below whichever is the lower of the discount rate at the Federal Reserve bank or the average issuing rate on the latest Treasury bill. Generally, the discount rate is used. The authority is used sparingly as a means of providing the money market with temporary funds to avoid undue strains. Securities held under such agreements are reported on the weekly Federal Reserve bank statement and in the Board's annual report.

Repurchase agreements are especially adapted to the implementation of open-market policies in times of temporary market tightness when there is only a temporary need for reserves. The principal merit of this instrument is that the reserves provided are automatically withdrawn when the transaction reverses itself, without any affirmative action by the Federal Reserve.

Although repurchase operations are regulated by the Federal Open Market Committee, the law does not specifically refer to such transactions nor make them specifically subject to the direction of the Federal Open Market Committee. The Board believes, therefore, that the specific amendment suggested in its recommendation No. 72 would be desirable.

Recommendation No. 73 would make certain changes in the paragraph of the law relating to the so-called settlement fund maintained with the Treasurer of the United States by the Federal Reserve banks.